Business objectives

Question 1

Total revenue formula

Answer 1

TR = P x Q

Question 2

Average revenue formula

Answer 2

AR = TR/Q

Question 3

Average revenue curve

Answer 3

Downwards sloping
D = AR

Question 4

Marginal revenue

Answer 4

The additional revenue a firm makes by selling one extra unit

Question 5

Total revenue curve

Answer 5

Increases as MR is positive, decreases as soon as MR is negative.

Question 6

Total revenue

Answer 6

The area of a chosen point of the AR curve, under the demand curve

Question 7

What happens to TR when demand is elastic and there is an increase in price?

Answer 7

Demand decreases by a more than proportional increase in price. TR decreases

Question 8

How does PED change as price decreases along the AR curve?

Answer 8

Elastic -> unitary elastic -> inelastic

Question 9

Where is revenue maximised?
And why?

Answer 9

MC = 0
- Firms may also maximise revenue in order to increase output and benefit from economies of scale
- In short term firms may use this strategy to eliminate the competition as the price is lower than profit maximisation point

Question 10

Short run

Answer 10

When at least one factor of production is fixed

Question 11

Long run

Answer 11

When all factors are variable, there are only variable costs

Question 12

Variable costs

Answer 12

Exists in the LR and SR. Vary with output. E.g wages

Question 13

Fixed costs

Answer 13

• Only in short run
• Don’t vary with output. E.g capital, salaries

Question 14

Total cost formula

Answer 14

TC = TVC + TFC

Question 15

Average fixed cost formula

Answer 15

AFC = TFC/Q

Question 16

Marginal cost

Answer 16

Additional cost of selling one extra unit

Question 17

Marginal cost formula

Answer 17

MC = Change in TC/Change in quantity

Question 18

What happens to marginal cost when productivity increases?

Answer 18

Marginal cost decreases

Question 19

Diminishing marginal returns

Answer 19

In the short run as more FOP are employed, initially productivity will increase but productivity will eventually diminish

Question 20

Average variable cost formula

Answer 20

AVC = TVC/Q

Question 21

Average total cost formula

Answer 21

ATC = TC/Q or AVC + AFC

Question 22

What are the 6 types of internal economies of scale?

Answer 22

1. purchasing economies
2. technical economies
3. managerial economies
4. marketing economies
5. financial economies
6. risk bearing economies

Question 23

Purchasing economies

Answer 23

Larger firms are able to negotiate much lower prices through bulk buying. Reduce their LRAC

Question 24

Technical economies

Answer 24

Larger firms can invest on specialist capital to increase productivity

Question 25

Managerial economies

Answer 25

Larger firms can employ specialist staff to increase productivity, therefore decreasing LRAC

Question 26

Marketing economies

Answer 26

Larger companies can pay for advertising by spreading the costs over units sold

Question 27

Financial economies

Answer 27

Larger firms can borrow for lower interest rates as the company is less risky

Question 28

Risk-bearing economies

Answer 28

Larger firms can use revenue to diversify. If one fails, having other companies reduce the risk of failure

Question 29

Reasons for internal diseconomies of scale

Answer 29

1. alienation 2. bureaucracy 3. communication

Question 30

Alienation

Answer 30

Alienation reduces employees motivation which decreases productivity

Question 31

Bureaucracy

Answer 31

They have to hire more managers and people that do filing. When too much money is spent on this. Increases LRAc

Question 32

Communication

Answer 32

Larger firms have slow communication. If the manager wants to receive a message has to go through many people before reaching the intended recipient

Question 33

What is the minimum efficient scale? (MES)

Answer 33

When a firm first reaches its lowest LRAC

Question 34

External economies of scale

Answer 34

Reductions in the LRAC as industries output increases.

Question 35

Show do we show external economies of scale on the LRAC curve?

Answer 35

The entire LRAC curve shifts down

Question 36

Profit formula

Answer 36

P = TR -TC

Question 37

Normal revenue

Answer 37

TR = TC (covering opportunity costs )

Question 38

Supernormal profit

Answer 38

TR > TC

Question 39

Satisficing

Answer 39

It involves the owners setting minimum acceptable levels of achievement in terms of revenue and profit

Question 40

Minimum efficient scale

Answer 40

- the lowest point on a cost curve at which a company can produce its product at a competitive price - at the MES point the company can achieve the economies of scale necessary for it to compete efficiently in the industry x

Question 41

Shut down point

Answer 41

- P< AVC - when variable costs cannot be covered

Question 42

Break even point

Answer 42

- TC = TR - after all costs are paid for there is neither profit nor loss